The following is a special guest post by FCA-regulated Forex and CFD broker Hantec Markets, on the one-year anniversary of last year’s surprise Swiss Franc spike.
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Black Swanniversary
For a while, the export driven economy of Switzerland has been hamstrung by the strength of the Swiss franc as its major trading partner, the Eurozone, has been bogged down in an economic quagmire. Battling against ongoing deflation, the Swiss National Bank (SNB) has been consistently trying to fight against the tide of euro weakness. Whilst the single currency was sold-off as the market moved to price in the prospect of the European Central Bank (ECB) firing its big bazooka of Quantitative Easing, the SNB was busy selling Swiss francs by the bucket load in an attempt to prevent the Swissy from strengthening. By the end of 2014 the SNB was selling as much as CHF20bn per week.
However, on 15th January 2015, the SNB decided enough was enough. The floor of CHF1.200 against the euro which had been capping the Swissy strength was formally removed. With the prospect of spiralling losses on its euro positions, the SNB felt that it had to do something as its intervention policy was getting out of control.
Having had the shackles released, the Swissy soared by around 40% in as many minutes. The volatility of that day will live long in the memory of forex traders. Around the world, brokers and their clients who thought they were in for a sure thing buying Euro/Swissy at CHF1.200 into perpetuity, had a rude awakening. With no liquidity to clear trades, gaps of an almost unimaginable size filled trading platforms, leaving many to nurse heavy losses amidst enormous market volatility. Never before has the disclaimer “losses can be greater than your initial deposit” been more pertinent for the retail trader.
So, one year on, where does monetary policy of the SNB sit now? Well, not a lot has changed. The central bank continues to battle strength of the Swiss franc and annual deflation of around -1.4% by engaging a negative deposit rate of -0.75%. The SNB has the world’s lowest official borrowing costs. However, the champagne would have been flowing at the SNB’s Christmas party after the ECB opted against increasing the scale of its monthly asset purchases. This was a move that allowed the SNB some respite. The SNB is traditionally conservative in its actions (with the one notable exception being its “Frankenshock” move of 12 months ago) and a recent poll conducted by Reuters does not expect the SNB to change its benchmark LIBOR rate until 2017.
However, the experience of the negative deposit rates in Switzerland have been relatively benign for the economy and should the ECB panic into further extension of its QE program, the risk is towards a further rate cut by the SNB. The Dollar/Swiss rate dropped in December as the Swissy strengthened on the back of the underwhelming ECB actions, but the uptrend channel of US dollar continues for now as the US has formally begun its tightening cycle. The SNB will hope that this is an ongoing scenario, but the major focus will be on the actions of the ECB.
Since the SNB decision last year, Hantec Markets has invested in and updated its risk management systems to further enable the firm to identify, manage and mitigate any potential risks. As the events of twelve months ago demonstrate, the next “crisis event” could come from anywhere and without warning. The SNB action was a rude reminder that robust risk management systems are imperative for a brokerage to succeed in this industry. Prior to this the industry appeared to be in a comfort zone as we watched the volumes grow. We believe we have learnt from the events of last year and our business continues to thrive.
The continuous growth of our client base and our clients’ trading volumes has lead us to source more liquidity to insure we maintain our high standard of service. Margins have been increased on certain currency pairs and other instruments offered by the firm since the SNB action and across the whole industry. This has been done on an NOP scale basis.